DBRS Morningstar Changes Trends on Shaw Communications Inc. to Positive and Confirms Ratings at BBB (low) and Pfd-3 (low)

DBRS Limited (DBRS Morningstar) changed the trend on all ratings of Shaw Communications Inc. (Shaw or the Company) to Positive from Stable. DBRS Morningstar also confirmed Shaw’s Issuer Rating and Senior Notes rating at BBB (low) and Preferred Shares rating at Pfd-3 (low). The trend change reflects continued subscriber and financial growth in the Company’s Wireless division, improved market position, and management’s focus on optimizing operational processes. The ratings continue to reflect Shaw’s well-established brand and market position in Western Canada, high-quality network, and wireless growth opportunity in attractive urban markets covering ~50% of the Canadian market. The ratings also consider the intense competitive landscape, high capital intensity, high dividend payout, and risks associated with the changing regulatory environment.

Shaw’s earnings profile began to improve in F2019 with higher revenue and margin contribution from its rapidly growing Wireless segment, which witnessed a solid increase in mobile subscribers (+18% year over year (YOY)) and industry-leading growth in average billing per user (ABPU; +6.3% YOY). Consolidated revenue grew by approximately 3% to $5.34 billion, as the revenue contribution from the Wireless segment grew by 16% to surpass $1.0 billion in F2019, representing 20% of consolidated revenue. As expected, revenue performance in the Wireline segment was relatively stable, up 0.2% YOY to $4.3 billion. EBITDA margins improved 70 basis points (bps) YOY to 40.3%, with margin expansion in both the Wireless and the Wireline segments related primarily to a higher revenue base in Wireless and ongoing cost-saving initiatives and operational efficiencies in the Wireline segment. As such, consolidated EBITDA increased 4.7% YOY to $2.15 billion in F2019. Key initiatives to maximize Consumer revenue through bundled product offerings and to optimize the cost-to-serve market should enhance internal operating efficiencies, improve the customer experience, and continue to improve future profitability.

Shaw’s financial profile strengthened in F2019. DBRS Morningstar cash flow from operations increased 41.9% YOY to $1.78 billion in F2019 and was sufficient to fund Shaw’s high level of capital intensity and material cash dividend payout. DBRS Morningstar notes that the lease-adjusted debt-to-EBITDAR ratio was temporarily heightened at 3.25 times (x) as at the end of F2019 due to the timing of debt repayment ($1.25 billion senior notes that matured in October 1, 2019), which the Company had prefunded through a $1.0 billion notes offering in November 2018. Pro forma the $1.25 billion note repayment, DBRS Morningstar estimates year-end F2019 lease-adjusted debt-to-EBITDAR at 2.79x. During F2019, Shaw completed the divestiture of its investment in Corus Entertainment Inc. (rated BB with a Stable trend by DBRS Morningstar) Class B shares for net proceeds of $526 million and paid $492 million in spectrum licences.

DBRS Morningstar believes Shaw’s earnings profile should continue to benefit from network expansion, enhanced product and service functionality, future product-suite offerings, and cost-optimization measures. While competition in the Wireline segment is expected to remain intense, it does not preclude Shaw from delivering modest-but-profitable long-term growth in its Consumer division. That said, Wireless segment growth in terms of subscribers and ABPU have performed better than expected over the past two years and should more than offset softer performance in the traditional cable and telephony services. Going forward, DBRS Morningstar expects Shaw’s revenue to grow in the low- to mid-single-digit range to $5.5 billion to $5.6 billion in F2020 and to approximately $5.8 billion in F2021, driven by substantial growth in the Wireless segment, partially offset by stable low-single-digit revenue declines in the Wireline segment. Consolidated EBITDA margin is also expected to increase modestly, primarily as a result of Wireless margin leverage driven by growing prepaid activations, higher-cost service plans, and improving churn metrics. As such, consolidated EBITDA is expected to increase to $2.2 billion to $2.3 billion in F2020 and toward $2.4 billion in F2021.

DBRS Morningstar expects Shaw’s financial profile to improve through the capital investment cycle, supported by sound operating performance and sustainable cash flows and reflecting EBITDA growth rather than debt reduction. Free cash flow is expected to strengthen through DBRS Morningstar’s forecast period, tracking improvement in operating income and benefits from a moderating level of capital intensity (i.e., capital expenditures-to-revenue). DBRS Morningstar expects free cash flow (before dividend payments) to be above $700 million in F2020. Shaw’s free cash flow-to-debt should improve to the mid-single-digit range. Gross lease-adjusted debt-to-EBITDA is expected to remain between 2.75x and 3.0x through F2023. DBRS Morningstar believes that Shaw has the capacity to absorb additional debt that may be required to further enhance its competitive positioning of the Wireless business in addition to what is currently contemplated. If Shaw continues to witness healthy net subscriber and financial growth in its Wireless segment and continues to deliver stable profit in its Wireline segment while sustaining its current leverage (i.e., gross debt-to-EBITDA ratio between 2.5x and 3.0x), a rating upgrade is likely. Conversely, if the Wireless division is unable to continue delivering improving profit growth and/or there is a material deterioration in Wireline operating performance in addition to a sustainable rise in leverage, a trend change to Stable may occur.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in Communications Industry and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada